Source: Bezinga —
Commercial real estate (CRE) can be an excellent alternative investment opportunity that can possibly outperform stocks and bonds. It’s a great tangible asset that can provide effective diversification, generate stable and competitive income and serve as a hedge against inflation, which are increasingly important considerations as the economy looks to move in the wrong direction. The following guide will provide a comprehensive rundown on how to invest in commercial real estate.
What is Commercial Real Estate?
The simplest way to define CRE is a property that has the potential to generate profit through rental income or capital gain. Commercial properties come in a wide range of forms. It can be anything from a self-storage facility, residential duplex or office building.
Local laws stipulate which specific areas are designated for commercial use or residential use through a process called zoning. CRE zoning in suburban areas often consists of a single business per building, such as a restaurant or car wash. Buildings in a commercial area might house businesses in the form of large office buildings and be rented by many different businesses.
Options for Investing in Commercial Real Estate
Investors can invest directly or indirectly in CRE. Direct investment occurs when an investor buys, owns and manages a property on their own by working with a real estate agent to conduct market research, choose a property and make an offer.
You can also invest in real estate indirectly if managing a building is too much work or beyond your risk tolerance. Real estate investors who take part in this manner are referred to as passive investors. This style of investing involves purchasing a stake in a company or partnership that owns and manages a property or group of properties.
Between direct and indirect investment, you can choose from a wide range of commercial properties, including anything from a duplex to the largest buildings in the nation.
Commercial Properties
Commercial properties are typically divided into six classes depending on function. Investing in commercial properties is typically suitable for high-net-worth investors. They can be a great way to generate cash flow and offer the potential for capital appreciation.
- Retail properties: Retail properties refer to properties that are used to market and sell consumer services and goods. This class includes shopping centers, community retail centers, regional malls and out parcels.
- Office spaces: Office properties are establishments that are primarily used for the purposes of operating and maintaining a corporate office. Broad categories exist for classifying office buildings: Class A, Class B and Class C. Class A buildings are considered best for construction and location; Class B properties may have high-quality construction, but are located in an undesirable location; and Class C properties may be in an unfavorable condition and in an undesirable location.
- Hotels: Hotel properties are establishments that provide paid lodging on a short-term basis. Hotels can vary significantly in price, depending on the quality of the building. The three types of hotels include full-service hotels, limited-service hotels and extended-stay hotels.
- Multifamily: A multifamily commercial property refers to an income-generating property used for residential purposes. Multifamily real estate has at least two units, making it different from single-family rental homes, which are also preferred by real estate investors. Multifamily properties are often considered to be more labor-intensive than leasing other commercial properties because tenants often opt for short-term leases.
- Industrial: Industrial commercial properties are versatile and vary significantly in size, depending on their specific characteristics. Common types of industrial properties include heavy manufacturing properties, light assembly properties, flex warehouses and bulk warehouses.
- Special purpose: Special-purpose property refers to miscellaneous properties that do not fit into the other types of commercial properties. Examples of special-purpose properties include parking lots, amusement parks, theaters, zoos and many other properties.
Real Estate Investment Trusts (REITs)
Real estate investment trusts (REITs) refer to companies that own, finance or operate a commercial property. REITs, which are modeled after mutual funds, combine the capital of many investors. This investment type enables investors to reap the benefits of investing in commercial property without having to manage, own or finance properties themselves.
REITs are accessible to retail investors and are generally publicly traded like stocks, which makes them extremely liquid (unlike traditional real estate investments). REITs can reflect multiple types of real estate properties, including hotels, offices, farmland and apartment buildings.
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